Various methods exist, which businesses use to determine and meet the costs incurred in both production and operational processes. Some businesses bundle together all the costs to identify the overall sum. While that is the case, other businesses focus on costs that result from specific activities. The latter method has proven effective as they have been applied by such companies as General Motors. Activity-based costing is the name given to this particular method (Jurek et al., 2012). The key feature of this method is that the overhead costs are calculated based on the intensity of manufacturing activity involved. This essay examines this costing method.
As noted above, a company such as General Motors has derived benefit from their use of the activity-based costing method. There are various signs that suggest that this method is appropriate for a product made by a company that manufacture automobiles. The large scale of production of automobile companies is among these signs. The activity-based costing method is applied to gain a clearer picture of the true cost of a product (Jurek et al., 2012). It allows businesses to ensure that the prices of products reflect the operationalized activities to promote product creation. Most automobile manufacturing companies are involved in large-scale production. The production processes are diverse (Omar, 2012). Patently, some processes require little activity while others demand immense overhead involvement. It would be unwise to apply the same costing method to the different processes. The activity-based costing method ensures that the costs and prices of the products created through the different processes are a true reflection of the activities involved. Therefore, the activity-based costing method is appropriate for a product made by an automobile company because it accounts for all the overhead activities involved.
Delegate your assignment to our experts and they will do the rest.
Automobile companies attend to the needs of a wide range of customers (Jurek et al., 2012). They release products meant for different income groups. Given this fact, it is important for these companies to ensure that their product costing methods are in line with the needs of their customers. The diverse demands and needs of customers is another sign that the activity-based costing method is appropriate for a product created by a company that manufactures automobiles. As already mentioned, these companies respond to the demands of different customers. They do this by developing a diversified product line. Each product attends to the needs of a given customer base. The creation of the different products involves different activities. There are some products whose creation is activity-intensive and there are others which do not demand much activity. To ensure that the prices of the products are fair, the activity-based method is applied.
It is common practice for companies to average product costs broadly. This method allows the companies to determine the mean cost of production. Managers should be worried when the product costs are averaged broadly. This is because when they are averaged broadly, the prices do not reflect the actual cost of the products (Needles, Powers & Crosson, 2010). For example, suppose a company produces different products. For some of these products, the company incurs very high costs. For the other products, the company incurs very low costs. If the company chooses to average the production costs, the cost will deviate significantly from the actual costs. The averaging method fails to account for outliers properly. The situation becomes even worse when firms average production costs broadly. Therefore, there is need for managers to apply other costing methods that offer a truer reflection of the actual cost of production.
In conclusion, it is important for companies to determine the cost of production. This enables them to ensure that the prices of their products are fair. Various methods that can be used for this purpose exist. Each of these methods has its own unique benefits. However, the activity-based method seems the most appropriate especially for large automobile companies. These companies have large and diverse product lines. They also serve different methods. These are reasons that make the activity-based costing method the most appropriate.
References
Jurek, P., Bras, B., Goldberg, T., D’Arcy, J., Oh, S. & Biller, S. (2012). Activity-Based Costing Applied to Automotive Manufacturing. Retrieved 10 th June 2017 from
http://www.manufacturing.gatech.edu/sites/default/files/uploads/pdf/Final%20version%20_Jan%2026%202012_.pdf
Needles, B. E., Powers, M. & Crosson, S. V. (2010). Financial and Managerial Accounting. Boston: Cengage.
Omar, M. A. (2012). The Automotive Body Manufacturing Systems and Processes. Hoboken,NJ: John Wiley & Sons.
